5/14/2001 @ 12:00AM

Share Scare

Chief executives are stuffing their pay packages with shares that will allow them to profit even if investors don’t. This is not a bullish sign from corporate bigwigs: They must expect things to get worse.

Follow the money, especially that of
Marc Bell
Marc
Bell
. That’s the conclusion Wall Street drew about
Globix
, a Web-hosting company whose stock began falling after the 33-year-old chief executive unloaded a quarter of his shares a year ago. The move suggested that the head guy lacked confidence in his company’s prospects. Deepening red ink and the market’s Web-o-phobia have knocked 95% off Globix, to a current $3 per share.

Well, then what should we make of the $6 million worth of free Globix
shares the company recently gave Bell, the first time it has granted such an award? Is it a bullish sign for Globix?

Called restricted stock, these things vest in four years—meaning all he has to do is stick around to benefit, assuming that the company survives. If he had gotten stock options, he’d at least have had to shell out some money to exercise them. With the restricted stock, he doesn’t even have to meet any performance objectives to benefit. Bell has it easy.

“This is heads I win, tails you lose,” says Mary-Ellen Robinson, an analyst at Proxy Monitor, an investment adviser critical of share dilution from Globix’s stock plan. “Bell is getting rewarded for tenure, not results.” The company says it needed to preserve options set aside in its stock plan for future hires, and that the $2.4 million Bell spent exercising old options since December shows confidence in Globix’s future. Wall Street remains unimpressed, and the stock hasn’t moved much.

When stocks were rising, executives liked options. Now they are falling in love with restricted stock. Absent a bankruptcy filing, it’s worth something even if the stock goes nowhere.

Joseph Bachelder, a New York lawyer who represents chief executives in negotiations over pay, helped design a precursor to restricted shares, called performance shares, as the market headed into its last big bearish spell. No surprise, they soon replaced options as the favored stock award. “Restricted shares are back because people are uncertain how fast we’ll pull out of this bear market,”he says. “The increase is as much a comment on stocks in general as on individual companies.”

Graef Crystal, a former pay consultant and current Bloomberg columnist, puts the matter more colorfully:”With restricted stock you just have to breathe 18 times a minute to make a profit.”

Is there any reason why shareholders should like restricted stock? Just a tiny one—the accounting is more honest for this benefit than for option grants. Compensation in the form of free shares has to be deducted along with other operating expenses in determining net income. The quaint rules for accounting allow, in contrast, compensation in the form of option payouts not to be booked as an expense.

Management may like restricted stock programs because shareholders are more likely to swallow them. When a company lowers the exercise price on options, letting executives be rewarded for failure, you usually hear howls of protest from the corporate governance watchdogs. Thus far, restricted stock hasn’t aroused as much interest. These free shares have been granted for years at many companies, and so increases don’t always jump out at investors.

So what does the sudden appearance of a restricted stock award say about a company? It surely isn’t an optimistic sign.

A quick look at a proxy can often make investors think twice about otherwise bullish signals from insiders. Take
MBNA
, for example. The longtime chief executive of this credit card company,
Alfred Lerner
Alfred
Lerner
, has never sold a share. But he has been getting more and more restricted stock over the past few years. Last year Lerner got $11 million worth, nearly double the value from the previous year. He was granted another $11 million worth this year, too. The company says that both awards were for MBNA’s stunning 40% compound annual return over the past ten years and that Lerner is “extremely confident” in the business.

Maybe so. But we’re in the midst of an economic slowdown, and cardholders often respond by skipping their monthly payments. For investors the telling detail may be how Lerner’s pay package has shifted. His restricted stock last year was worth even more than the options he received, as valued by the Black-Scholes pricing model. The freebie shares comprised 63% of the total stock portion of his pay, up from 37% a year earlier.

CVS
is another highflier whose proxy should raise eyebrows. The drug retailer, which is trading at 31 times earnings, gave Chief Executive
Thomas Ryan
Thomas
Ryan
$5.5 million worth of restricted stock last year. That equaled 66% of his stock pay. The company says that the grant is part of a new program to retain key executives in a “competitive industry.” The shares vest after four years.

And
Citigroup
? Although you can’t quibble with his remarkable record, Citi’s
Sanford Weill
Sanford
Weill
got $9 million in restricted stock last year as he still worked to stitch together Travelers and Citibank. To the company’s credit, Weill had to meet performance targets—10% annual return on equity, for instance—before he was granted the shares. The award, part of a bonus and vesting in three years, reflects past success only.

Or are they also a comment on the future?
Vance Coffman
Vance
Coffman
, the chief executive of
Lockheed Martin
, got $1.9 million in restricted stock last year. This was in recognition, Lockheed says, of the 55% bounce in the shares last year. This is the first such grant to a top executive since the company was formed in 1995.

Should new chief executives get large grants?
PNC Financial
gave $3.9 million of restricted stock to
James Rohr
James
Rohr
, who became the boss last year. His options were worth $2.8 million, according to Black-Scholes. The free shares vest in three years. The award to Rohr was the bank’s first grant of its kind to a chief executive in 13 years, but PNC insists it is not a bearish signal. The package, it says, is similar to those at competitors.

In other words, everybody’s doing it. Isn’t that the justification that shareholders heard for those lavish option packages in earlier years?